How is a cash budget prepared
The Cash Budget
in this video we're going to walk
through an example of how to put
together a cash budget for a firm so
first it's important to understand that
before you put together the cash budget
you need to have all the other budgets
they have to be prepared for us so when
we think about like the sales budget the
production budget all these other
budgets have to be put together in order
to be able to even make the cash budget
right so we need to know about our
direct material expenditures that we're
planning before we would be able to put
together the cash budget so then in
addition to that it's just really
important to know how important it is to
have a cash budget for a firm because
you might have the best idea in the
world but if you run out of cash you are
not going to have a business so you
might say well hey if you have a great
business why would you ever run out of
cash well there might be something like
for example things like seasonality of
your business right you might run a ski
resort and it might be an incredible ski
resort but you don't plan on the fact
that oh wait in the summer months we're
just not going to have any cash coming
in you have to go on plan you have to
budget for that so that you have the
cash when you need it so let's walk
through an example and actually I've
chosen an example that would have to do
with seasonality and we'll think about
our example we've used in the previous
budget videos we'll talk about a firm
that makes bicycles right now you might
imagine that a firm the Mike's makes
bicycles might sell more bicycles in the
summer months than it would in the
wintertime when there's snow on the
ground so we've got this this kind of
seasonality issue and we can look at
that when we think about how our cash is
going to flow throughout the firm do it
during the year so now when we start out
with when we do our cash budget the
first thing is we start with what is our
beginning balance and and for the moment
let's just focus on quarter one I've
written out all the quarters and then
for the year because we're going to do
it on a quarterly basis and I've written
it out so that you didn't with this
video wasn't an hour along with me
writing all these things out but if you
just focus on this column right here and
then and then we'll get to the other
columns later so the first quarter we're
starting out with with our cash balance
of twenty-five hundred
right so at the beginning of this year
we look at the bank account and we say
we've got 2500 2500 bucks but then we
need to add in our cash receipts when
we're talking about cash receipts we're
talking about cash we collect from
customers right so for the most part
when we think about cash for receiving
it's just money from customers we could
make this maybe more complicated and
start thinking we have income from other
sources maybe we own a little bit of
real estate and we get some rental
revenue but we're not thinking about
that this is just a really simple
example when people buy bicycles or come
other businesses buy bicycles from us
those are our customers and then we're
going to receive cash from them now this
is where it comes into play that we
already need to know have done our other
budgets for example our sales budget
right because our sales budget we're
going to know the number of bicycles we
plan to sell and the price we plan to
selamat and that's where we're going to
get this 15 grand from right in quarter
one we went to our sales budget and said
okay how much are we going to receive
from our customers how many bicycles
that we're going to sell it what price
and so forth so we use that information
from that budget to input this $15,000
so that doesn't just come out of thin
air it comes from another budget now
once we know that we can actually put
together the cash available right and
cash available this is really simple if
you think about it this isn't really
that complex we're just saying we
started with 2,500 bucks in the bank and
we're planning on generating 15,000 in
cash from the bicycles that we're going
to sell in quarter 1 so cash on hand
cash available however you want to think
about it we're going to have seventeen
thousand five hundred dollars cash in
quarter one now you might be saying well
hey we're going to spend money to get
direct materials to make those bicycles
and so well that's what's coming next
now we think about our dispersed out
disbursements now will their
disbursements again we've got this issue
and here's our disbursements I've kind
of got a little while heading there and
all these here are our disbursements so
when we think about this all these are
going to come from those other budgets
that's what we talked about that you
make the cash budget last because we got
to look at the direct material budget
and say hey we've budgeted $3,000 in
expenditures for quarter 1 on direct
materials we've budgeted $4,000 in
expenditures from the direct labor
budget the overhead budget says 2004
quarter 1 and then the sgna budget says
10,000 so we pull all these numbers from
other budgets and so when we think about
all those disbursements we can just lump
them together and say we've got 19,000
and disbursements and so we can compare
that now compare our disbursements this
19,000 right which is the sum of all
these right here and then compare that
against the cash we had available all
right so we say we have 17,500 and cash
available but we're spending 19,000 hey
the disbursements are more than the cash
available well what does that mean that
means that we're going to have a
shortage of cash or a deficiency of cash
right now I've got this here we've got
this line item access or shortage and
I've got shortage in parentheses and the
reason for that is that that means that
if this number here is in parentheses
it's negative right instead of putting a
negative sign we just put it in
parentheses that's the custom so we just
said cash available minus disbursements
is going to be negative 1500 or 1500 in
parentheses that means that we are going
to be 1,500 short this quarter well does
that mean that we go out of business and
we go bankrupt in Quarter 1 well not
necessarily because we can go and we can
borrow money to what we would love we
hope we can borrow money in order to
keep the business going so that's going
to lead to our next section which is
actually called the financing section
and I and I left out the the financing
title and here because I want to be able
to fit all of this onto one screen here
so that you can read it I know there's a
lot going on just bear with me
so the borrowing section is going to be
maybe we have a line of credit with the
bank right some firms have a thing where
they say ok if we ever fall where we
have a shortage of cash in this corridor
we just generate automatically the bank
generates a hundred thousand dollar line
of credit at X percent interest rate but
we're going to say we're going to make
this really simple
we don't even have to think about
interest in our problem we're going to
say that you borrow the money from a
family member so you go to one of your
parents and you say hey I got this great
business but in the first quarter we've
got a shortage of cash and and then the
the summer months when we sell more
bicycles everything's going to be
alright but just right now I need a
little money and they say how much do
you need and you say you could say well
I just need 1500 to cover the shortage
but then you'd have zero so you're kind
of playing fast and loose with how much
cash you have but you might say you know
as a general rule I like to have at
least $2,000 in the bank at any given
time just in case there's an emergency
or something I didn't plan for so you
say I want an ending balance of 2,000 to
get that ending balance given you have a
shortage of 1500 what do you need in
terms of borrowings to cover the 1500
and to cover this 2,000 you want to end
with well that's going to be 3,500 right
because if you took 3,500 and you
subtracted out this shortage of 1500
then that's going to give you 2 grand
right so then you're left with $2,000
and repayments if you see these two ray
or we're talking about repayments we're
not going to we're not repaying this in
this quarter will repay it on some point
in the future when we generate some more
money and again we don't have to worry
about interest at all because it comes
from a family member who is so generous
they're not going to charge us interest
on the loan and so our final and again I
hope you can see all this in the screen
and that some of its not being cut out
but we started with fifteen or twenty
five hundred dollars in cash at the
beginning of this quarter and now we're
ending the quarter with two thousand
thanks to this this loan is borrowing
from one of our family members that
helped us deal with this shortage of
cash now now we can start thinking about
I'll just grow up so you can see the
quarters in that was all four quarter
one and then quarter two I'm going to
walk through a little more quickly
because we just went through it we
scroll down so now we're going to start
with two thousand dollars and you might
say where'd you get that two thousand
dollars from well we got it because the
beginning balance of quarter two is the
ending balance of quarter one right
so we start with that mm and then we say
okay now we're receiving 90,000 where
did we get that 90,000 from customers
came from our sales budget right now
that means cash available a ninety two
grand and then now we've got our
disbursements those come from our other
budgets our direct material budget our
SGA budget and so forth disbursements
total up to 46,000 we take the cash
available in ninety two thousand
subtract the disbursements of forty six
thousand and that leaves us with another
forty six thousand but this time it's an
excess that means that we have more cash
after we've said okay how much cash do
we have and how much do we spend we have
46,000 left over now we don't need to
borrow anything this time because we
have an excess of cash we have extra
cash and so we're going to do a
repayment right we're going to do
repayment and so this is thirty five
hundred to repay that loan to the family
member and I've got the thirty five
hundred in parentheses because we're
saying this is negative this is this is
I've just just little convention here so
we know that this thirty five hundred
from the borrowing has been zeroed out
and so we're saying that ultimately even
though we have an excess of cash of
forty six thousand we're subtracting the
thirty five hundred we repaid alone and
so now our ending balance is forty two
five which is forty six thousand - the
$3,500 repayment now in quarters three
and four it's a little simpler because
we don't have any borrowings or
repayments or anything going on and you
notice so I'm not going to walk through
all of Quarter three and quarter four
because they're fairly straightforward
you should be able to figure it out at
this point now when you look at it we
say hey we're really generating a lot of
cash in these summer months right
because we're collecting a lot more from
customers right quarter two and quarter
three we're generating ninety thousand
and sixty thousand and cash receipts
from customers respectively whereas in
quarter one we only generate fifteen
thousand right because there's not a lot
of people buying bicycles in January
they're buying them in June and so forth
so we've got the seasonality issue
where we had problems in quarter one
with cash but we were able to budget we
are able to plan and show our family
member and say hey look we're going to
generate a lot of cash in the summer
right well we're going to sell a lot of
bicycles we just need you to float us
this money right now so we can deal with
the temporary shortage but if we didn't
have a budget if we didn't have a plan
then we would have all kinds of issues
because we don't really have a plan of
how we're going to have the cash to
finance and fund our business throughout
the year and then when we we look at our
final column we've got our year year
total and it basically a lot of this is
just summaries of things throughout the
year here's the summaries of our
disbursements and so forth but when we
look of course at the beginning balance
it's the beginning balance of quarter
one not not the total of all these four
four reasons we talked about in our
previous videos and ultimately at the
end of the year we're going to be left
with seventy three thousand five hundred
dollars which is also the ending balance
of course four quarter four
